A steep fall in merchandise trade has caused the current account deficit (CAD) at elevated levels and India needs capital inflows of up to $70 billion a year for the next few years to bring it down to 2.3 percent of GDP, Prime Minister's Economic Advisor C Rangarajan said today.
"To sustain 2.3 percent CAD over the medium-term, we would need net capital inflows of at least $ 50-70 billion annually over the next five years. "Given the uncertainty around both the push factors (rising global risk aversion) as well as pull factors (slow growth here) that determine capital inflows, attracting such a magnitude of inflows could very well be an uphill task," said the Chairman of PM's Economic Advisory Council (PMEAC) while delivering a lecture here this evening.
However, the former Reserve Bank Governor said there is an expectation of the CAD to be around 3.5 percent of GDP in the current fiscal. Blaming the merchandise trade deficit as responsible for the higher CAD of 3.9 percent in the first quarter of the fiscal, Rangarajan said "we should also aim at reducing the trade deficit to 6 percent from the current 10 percent".
The former Central banker admitted that it may not be possible immediately to bring it down to 2.3 per cent but expressed confidence it can come down to 2 percent of GDP in the next six to ten years. The Government is looking at a CAD figure of below 2 percent.
Rangarajan said to sustain the CAD at a comfortable level of 2.5 percent of GDP, the country will require capital flows of USD 50-70 billion per year for the next five years. The CAD, or the imbalance between foreign exchange earned and foreign exchange expended, stood at 3.9 percent of GDP in the first quarter of FY13, but better than 4.5 percent recorded during Q4 of FY12 on the back of slowing imports. CAD stood at 4.3 percent in FY12.
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Updated Date: Dec 20, 2014 13:23:00 IST